In a much anticipated decision, the California Supreme Court ruled on August 7, 2008 in Raymond Edwards II v. Arthur Anderson LLP that California’s Business & Professions Code §16600 means exactly what it says: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Section 16600 excepts non-competition agreements only in the sale or dissolution of corporations (Section 16601), partnerships (Section 16602), and limited liability corporations (Section 16602.5). Thus, an employer “cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless that agreement falls within one of the [aforementioned] exceptions.”

In so ruling, the court flatly rejected a recent Ninth Circuit line of cases that have created, by judicial interpretation, so-called “narrow-restraint” exceptions to 16600. By way of example, the Ninth Circuit, in interpreting Section 16600, has ruled that an agreement mandating that an employee forfeit stock options if employed by a competitor within six months of leaving employment did not violate 16600, nor did a bargained for contractual provision barring one party from courting a specific named customer, reasoning that it did not entirely preclude the party from pursuing its trade or business.

The court, in rejecting the Ninth Circuit’s position, took care to note that California courts have never embraced the Ninth Circuit’s narrow restraint exception, and that no reported California state court decision has ever endorsed the Ninth’s Circuit’s reasoning. Rather, the opinion notes that, from the court’s perspective, California courts have been clear in their view that Section 16600 is unambiguous, and that it “represents a strong public policy of the state which should not be deluded by judicial fiat.” Indeed, in rejecting Arthur Anderson’s contention that the court should adopt the Ninth Circuit’s narrow-restraint exception, the court noted, “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it would have included language to that effect.”

Based on its clear and unambiguous reading of 16600, the California Supreme Court struck down as unenforceable Arthur Anderson’s non-compete provision, which precluded its employee from performing professional services for certain Anderson clients for a period of 18 months post-termination, and for 12 months after leaving the firm, from soliciting (to perform professional services of the type he provided) any client of the offices to which he was assigned during the 18 months preceding his termination.

Although clearly rejecting the Ninth Circuit line of cases, the court also took care to preserve the trade secret exception to Section 16600, stating in an important footnote contained in the opinion: “We do not here address the applicability of the so-called trade secret exception to Section 16600, as Edwards does not dispute that portion of his agreement.” Indeed, the court took care to cite favorably Thompson v. Impaxx, Inc., a 2003 California appellate court opinion which recognized that non-solicitation of clients provisions may be enforceable if they are necessary to protect trade secrets and proprietary information.

What this case means to employers who employ individuals in California:

• All contracts restraining California employees from competitive activities post-termination should be carefully reviewed to ensure compliance with the Anderson decision. Based on established case law, choice of law provisions designating the law of another state as controlling the agreement will not protect employers who find themselves in California courts.
• To the extent employers utilize non-solicitation of client clauses, employers should ensure that they can demonstrate that they are tied to the protection of trade secrets and proprietary information.

For more information regarding non-compete agreements, please contact one of the members of Greenberg Glusker’s Employment Group: Nancy Bertrando or Diane Cumpacker at (310) 553-3610.